In the realm of international finance, standard hedging can be a resourceful tool to a financial firm. In order to figure out the pros and cons of hedging, one needs to understand two basic terms: exchange risk and hedging. The term exchange risk, also known as foreign-exchange risk, is defined as “the risk of an investment’s value changing due to changes in currency exchange rates.” Furthermore, exchange risk can affect both export/import businesses and investors making international trades. Hedging is the financial term for mitigating risk.

The idea of marine insurance is the same as with other kinds of insurance in that there are two parties: the assured and assurer (or carrier). The marine policy may cover the risks of a single voyage, or may insure for a certain period of time. Goods or cargo are almost always insured by voyage. Boats are usually insured for certain period of time, usually they are contracted year by year. Cargo policies may be on a may be open to cover cargo as shipped by the insured. The insurance of boats, equipment and belonging, may cover a ship or a whole fleet.

The two most widely used financial hedging tools are forward exchange contracts and over the counter options.  When dealing with booked transaction exposures, forward contracts are the methods used.  Options on the other hand, are hedging strategies that are extensively used for minimizing risk off balance sheet transactions.  Over the past decade the corporate practice of foreign exchange exposure has become a bit more systematic.   There has been a development in relatively inexpensive computer instruments that assist in financial data, technical currency rate trend analysis, and systems

Cross hedging is the strategy using a forward contract in a related currency correlated to the currency that we are unable to purchase a direct forward contract. Cross hedging is used as a tool to manage transaction exposure, and it requires high correlation between the two currencies to work effectively.

Money Market Hedge is a processes of borrowing and lending in multiple currencies, for example to eliminate currency risk by locking in the value of a foreign currency transaction in one’s own country’s currency. Here is an example of Money Market using futures contract with a bank:

The management of accounting exposure revolves around the concept of hedging. The concept of hedging is also use to manage currency fluctuations. Hedging a currency means establishing an offsetting currency position to lock in the home currency value for the currency exposure. The basic objective of hedging is to reduce and eliminate exchange rate.

Arbitrage is an investment practice used to take advantage of price differences in different markets. This occurs with items that have identical characteristics and are perfect substitutes. Arbitrage has a major effect on the global financial sector. The logic behind this is that arbitrage affects exchange rates, interest rates, and inflation rates.

Hedging is the process of avoiding or minimizing risk by offsetting an investment with another. A hedger is somebody who puts these practices into action. In international situations, multinational corporations are most likely the ones to engage in this type of behavior. The way this is done is by holding on to forward contracts in order to guard the home currency value of international currency assets and liabilities.